Japan factory output brightens outlook

Japan factory output brightens outlook

Tokyo / Osaka: Japanese factory output grew more than expected in July and is poised to expand for a second quarter as global stimulus boosts exports, supporting a brighter central bank assessment of the deflation-bound economy.

The economy was showing some signs of a recovery, Bank of Japan Governor Masaaki Shirakawa said, and a decline in consumer prices was likely to slow as the economy recovers in line the central bank projections.

The central bank said in its latest monthly report earlier in the month that the economy was levelling out.

Industrial output grew for the fifth straight month in July while a survey of purchasing managers showed that the manufacturing industry was at its most active in nearly three years this month, although analysts warned demand could soon fade as the effects of fiscal spending peters off.

“Japan is picking up from a very low level and we don’t want to make the mistake of thinking it is back on a fast track to growth," said Sebastien Barbe, an economist at Calyon in Hong Kong.

“Exports across Asia are still quite weak and we need to see the US economy in particular accelerate."

Shirakawa said there were clearer signs of a recovery in exports and output, but added that a rapid turnaround was unlikely. “At present, Japan’s economic conditions are showing some signs of recovery. At the same time, the bank fully recognises that the outlook is associated with great uncertainty," he told business leaders in the country’s second-biggest city of Osaka.

Data on Monday showed that Japan’s factory output rose 1.9% in July, faster than a median forecast in a Reuters poll of 1.4%, but slower than a 2.3% gain in June.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) said they expected output to rise 2.4% in August and 3.2% in September.

Based on current forecasts, industrial production is expected to rise 8% during July to September, a METI official said, which would provide a further boost for an economy that emerged from its longest recession since World War II in the June quarter.

Output grew 8.3% in second quarter, its first gain in five quarters, following a record fall of 22.1% in the first.

Stimulus fading?

Analysts remained cautious, however, noting that the rise in output in July reflected demand for cars as a result of stimulus spending by governments.

“Current output growth is led by one-off factors and the capacityutilisation rate remains low, so a slowdown is anticipated towards the end of this year and early next year and the downtrend may be exacerbated by weak domestic demand in the face of the worsening job situation." Said Hiroshi Shiraishi, economist at BNP Paribas.

Japanese wage earners’ total cash earnings dropped 4.8% in July from a year earlier, after falling a record 7% in June, government data showed. With the unemployment rate jumping to a post-war high of 5.7% in July and companies under pressure to cut costs to stay competitive, downward pressure on wages is expected to continue. This could add to the deflationary pressures in the economy.

Core consumer prices fell a record 2.2% in July. The BOJ has forecast two years of deflation but is likely to extend that to three when it issues its twice-yearly outlook report in October.

A Reuters poll shows analysts expect the BOJ to keep rates steady at 0.1% at least until March 2011. Reflecting the pick up in activity, the Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 53.6 in August, the highest since November 2006 and above 50—a threshold that separates contraction from expansion—for a second month in a row.

The index for new export orders rose for the seventh consecutive month, thanks to stronger demand from China, although the pace of the gain slowed. “Exports may be losing momentum," said Minoru Nogimori, an economist at Nomura. “We will have to focus on new export orders increasingly as one of the most important indicators regarding the outlook for Japan’s economy."

The survey also showed manufacturers continued to expect output prices to fall, highlighting weak demand.